The recent federal budget provided for two tax incentives which apply in limited circumstances – when used together however, they can create a positive immediate cash-flow effect.
The Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 became law on 14 October 2020. This Act contains five tax measures that were announced in the recent federal budget. Two of these measures, when applied in combination, present an opportunity for most businesses to acquire eligible depreciable assets of any value with pre-tax money, and deliver cash flow benefits in the form of recovered tax from the year prior. You can refer to our Morrows 2020-21 Federal Budget Report blog post here for more details on all of these measures.
How it would work
Full expensing of depreciating assets measure
In the current 2021 tax year, Acme Pty Ltd purchases machinery valued at $1m for its business. Previously, Acme Pty Ltd would need to write off the machinery over its effective life, i.e. small deductions each tax year. As a result of the recent changes, Acme Pty Ltd should be eligible to fully expense the cost of the machinery in the 2021 tax year (provided it meets other current requirements such as starting to hold the machinery or having the machinery installed and ready for use by 30 June 2021).
Loss carry back measure
After deducting the $1m cost of the machinery in full, Acme Pty Ltd makes a tax loss of $750,000 in the 2021 tax year (instead of having taxable income of $250,000 had it not bought the machinery). Previously, Acme Pty Ltd could only apply that tax loss against future taxable income. As a result of the recent changes, Acme Pty Ltd can carry back its 2021 loss and get a refundable tax offset for the 2021 tax year (capped at Acme Pty Ltd’s franking account balance). The refundable tax offset is a proxy for the tax Acme Pty Ltd would save if it deducted the loss in the 2020 tax year.
So, if Acme Pty Ltd was a base rate entity in the 2021 tax year, its tax rate would be 26%. Accordingly, Acme Pty Ltd’s loss carry back tax offset is 26% x $750,000 = $195,000 (on the basis that its franking account balance exceeds this amount). Assuming Acme Pty Ltd had tax payable of $95,000 in the 2020 tax year, it would receive a tax refund of $195,000 – $95,000 = $100,000 after lodging its 2021 tax return. This is free cash flow that can be applied in Acme Pty Ltd’s business once received.
This blog is for general information only. It should not be taken as constituting professional advice from the website owner – Morrows Group. Before acting on this, you should consider seeking independent legal, financial, taxation or other advice to check how this blog relates to your specific circumstances.
How can Morrows help?
Morrows Legal and Morrows BizTax divisions can advise on your eligibility for these two tax measures, as well as discuss the appropriateness of the purchase and commitment.